Cash Advance Reforms
Posted on Sunday, August 29th, 2010 at 10:41 am in Cash Loan Info by State, Miscellaneous Cash Loan Info
No credit short-term lending services like cash advances and payday loans have been a hotly contested issue in most states across the US. Consumer advocates trying to protect the poor misdirect their efforts in attacking the industry that provides the most beneficial financial service for people with bad credit, no credit, or in a temporary cash emergency. It’s better for states to regulate the payday loan industry to encourage good lending practices and affordable fees rather than eliminate a useful service for an underserved demographic.
It’s true that short-term cash advances have higher interest rates than credit-based bank lending services, which approve loans based on credit history to determine a borrower’s risk to the lender. Cash advances are designed to extend short-term credit to consumers from all financial backgrounds, so no credit check is needed for approval. Payday lender’s instead determine a customer’s eligibility based on their monthly salary: Does the customer earn enough in a month to afford payment at the end of the loan terms? If so, the loan is approved regardless of the customer’s credit history. Because of the high risk to the lender, cash advances have a higher interest rate than their credit-based counterparts.
Higher interest rates don’t mean that cash advances and payday loans are unaffordable for the consumers who need them. The lender needs to charge enough to cover overhead costs of operation and compensate for high-risk lending, but states can step in to make sure cash advance customers are not overcharged. Most states that legislate payday lending cap interest rates at about 10 to 15% of the borrowed cash amount. This compensates lenders for the risk while protecting consumers from unfairly inflated costs.
Consumer advocates shouldn’t try to shut down a valuable consumer credit service. Instead, they should push for state reform to benefit both the payday lenders and their borrowers.
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